The North Carolina Bar Approves Passing Your Litigation Cost Protection Premium to Your Client

2018 Formal Ethics Opinion 6

Shifting Cost of Litigation Cost Protection Insurance to Client

Adopted: July 27, 2018

Opinion rules that, with certain conditions, a lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict.

Inquiry:

Lawyer would like to purchase “litigation cost protection” insurance for matters he handles on a contingency fee basis. The insurance is purchased by a lawyer on a case-by-case basis for a one-time premium payment. The insurance is available for purchase up until 90 days after the initial complaint has been served upon the defendant(s). The insurance reimburses a lawyer for litigation costs advanced by the lawyer only in the event of a trial loss.

Inquiry #1:

Do the Rules of Professional Conduct prohibit a lawyer from purchasing litigation cost protection insurance for his contingency fee cases?

Opinion #1:

No. A lawyer has a duty to avoid conflicts of interest with his client. According to Rule 1.7(a), a lawyer has a conflict of interest if the representation of a client will be materially limited by a personal interest of the lawyer. The purpose of the insurance policy is to protect the lawyer’s investment in the costs and expenses of litigation. However, the insurance reimburses the lawyer only in the event of a trial loss. The lawyer and the client may have different cost-benefit calculations. Therefore, the terms of the policy incentivize going to trial in certain scenarios, which raises the possibility of a conflict of interests between the lawyer and the client.

However, there are inherent conflicts of interests present in every case taken on a contingency basis. A lawyer may prefer that his client accept a low settlement offer to ensure that the lawyer receives his fee, while the client wants to reject a settlement offer and take his chances at trial. In either event, the client has the ultimate authority regarding settlement of the client’s matter. Rule 1.2(a)(1). The presence or absence of a litigation cost protection insurance policy does not alter this dynamic of the client-lawyer relationship.

Lawyer may purchase litigation cost protection insurance so long as Lawyer does not allow the terms of the coverage to adversely affect Lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.

Inquiry #2:

If Lawyer recovers funds for the client through a settlement or favorable trial verdict, Lawyer proposes to be reimbursed for the insurance premium from the judgment or settlement funds. Lawyer intends to disclose the cost of the insurance to the client as part of the representation agreement.

May Lawyer include in a client’s fee agreement a provision allowing Lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict?

Opinion #2:

Yes. A provision in a fee agreement requiring client reimbursement of a particular expense implicates a lawyer’s professional duties under Rule 1.5. Rule 1.5(a) provides that a lawyer shall not charge an illegal or clearly excessive fee or charge or collect a clearly excessive amount for expenses. Rule 1.5(b) requires a lawyer who has not regularly represented a client to communicate to the client the basis of the fee and expenses for which the client will be responsible. Specifically as to contingency fees, Rule 1.5(c) provides:

A contingent fee agreement shall be in a writing signed by the client and shall state the method by which the fee is to be determined, including the percentage or percentages that shall accrue to the lawyer in the event of settlement, trial, or appeal; litigation and other expenses to be deducted from the recovery; and whether such expenses are to be deducted before or after the contingent fee is calculated [emphasis added]. The agreement must clearly notify the client of any expenses for which the client will be liable whether or not the client is the prevailing party….

The premium for the insurance is an “other expense” that Lawyer intends to deduct from any recovery. Therefore, the amount of the insurance premium must not be clearly excessive, and the circumstances under which the client is responsible for reimbursement of the premium must be clearly communicated to the client and clearly set out in the written fee agreement. Lawyer must describe with specificity what the insurance is and why Lawyer believes a litigation cost protection policy will serve the client’s best interests. Lawyer must also inform the client that other lawyers may choose not to purchase or to charge the client for the cost of a litigation cost protection policy. Finally, Lawyer must provide the client with the opportunity to review the insurance policy.

The Florida Bar determined that litigation cost protection insurance is “part of a business agreement, albeit with a third party rather than with the client, creating circumstances resembling the conflicts of interest that can arise, and be cured, pursuant to [Rule 1.8(a)].” Florida Bar Staff Opinion 37289 (Revised 2018). Florida’s version of Modal Rule 1.8(a) (which is substantially the same as NC Rule 1.8(a)) provides that a lawyer may enter into a business transaction with a client or acquire a pecuniary interest directly adverse to a client if: (1) the transaction and terms are fair and reasonable to the client and are fully disclosed and transmitted in writing in a manner that can be reasonably understood by the client; (2) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel on the transaction; and (3) the client gives informed consent, in a writing signed by the client, to the essential terms of the transaction and the lawyer’s role in the transaction.

The Florida Bar concluded that in each instance in which a lawyer wishes to purchase litigation cost protection insurance and shift the cost to the client, the lawyer must consider the ethics concerns set out in Rule 1.8(a). Florida Bar Staff Opinion 37289 (Revised 2018). The Florida Bar also concluded that, prior to seeking the client’s informed consent, the lawyer must make “an objectively reasonable determination” that purchasing the insurance benefits the client prior to seeking the client’s informed consent. Id.

Similarly, a North Carolina lawyer must satisfy these professional responsibilities, in addition to those implicated by Rule 1.5, when the lawyer intends to be reimbursed for the insurance premium from the judgment or settlement proceeds. The lawyer may include in a client’s fee agreement a provision allowing the lawyer’s purchase of litigation cost protection insurance and requiring reimbursement of the insurance premium from the client’s funds in the event of a settlement or favorable trial verdict upon satisfying the following conditions:

(1) the amount to be charged to the client is not clearly excessive under the guidelines set out in Rule 1.5;

(2) the circumstances under which the client is responsible for reimbursement of the insurance premium are clearly communicated to the client and clearly set out in the written fee agreement;

(3) the lawyer fully explains to the client what litigation cost protection insurance is, why the lawyer believes a litigation cost protection policy will serve the client’s best interests, and that other lawyers may advance the client’s costs without charging the client the cost of a litigation cost protection policy;

(4) the lawyer provides the client with the opportunity to review the litigation cost protection policy;

(5) the transaction and terms are fair and reasonable to the client pursuant to the guidelines set out in Rule 1.8(a);

(6) the client is advised in writing of the desirability of seeking, and is given a reasonable opportunity to seek, the advice of independent legal counsel regarding the arrangement;

(7) the lawyer obtains the client’s informed consent in writing at the beginning of the representation; prior to seeking the required informed consent, the lawyer has to make an objectively reasonable determination that purchasing the insurance benefits the client; and 

(8) the lawyer does not allow the terms or availability of coverage under the insurance policy to adversely affect the lawyer’s independent professional judgment, the client-lawyer relationship (including the client’s ultimate authority as to settlement), or the client’s continuing best interests.